Veteran economist discusses how the potential shutdown could raise fears of a recession
With the September meeting of the Federal Reserve in the rear-view mirror, and the next meeting still a month away, all eyes in the mortgage industry now turn to the issue of funding for the Federal Government.
The government will run out of funding on Tuesday unless Congress passes a new funding bill or a short-term continuing resolution. Without either of those, the government will shut down on Wednesday.
So far, negotiations on a bipartisan bill have stalled, and barring a change before Tuesday, the shutdown will take effect at midnight on Tuesday. So what does that mean for mortgage rates?
Selma Hepp (pictured top), chief economist at Cotality, said it is hard to predict the exact reaction of markets during a government shutdown. However, a shutdown could reignite fears of a recession. This could lead to a rush to the Treasury market, which could, in turn, lower mortgage rates.
“It's so hard to make a call these days, because you expect things to work in one direction, because they've always worked in that direction, and now they're working in a different direction,” Hepp told Mortgage Professional America. “I would think that if there is a shutdown, the fears of recession are going to increase again. They’re not as high as they were back in April, when we were so worried about tariffs being enormous. But if there's a flight to treasuries, that would pull yields down.”
An unpredictable market
Hepp said that while a surge in Treasury activity could lead to lower rates in the short term, a shutdown would also bring with it the fear that the government is unable to pay its bills. This could unsettle the markets.
Market uncertainty is why even the most experienced economists are having a hard time predicting where rates are headed.
“The fear then, is that the government is not paying its bills, and the long-term fiscal situation,” she said. “I'm having a hard time these days, really figuring out whether we're going up or down or left or right. I don't have a good sense of things. I really don't.”
Fed cuts have stirred hopes for lower mortgage rates, but Melissa Cohn of William Raveis Mortgage warns that “too much noise” makes forecasts uncertain. From tariffs to politics, unexpected shifts keep the outlook unclear.
— Mortgage Professional America Magazine (@MPAMagazineUS) September 18, 2025
Read full story here.https://t.co/hiFH3Nr1B0
It’s been a volatile year in the markets, and a government shutdown might bring a new wrinkle. The Trump administration is threatening not just furloughs of federal workers during a shutdown, but rather job layoffs. The threat of permanent job cuts could further weaken the labor market, which was one of the factors contributing to the recent decline in mortgage rates.
For Hepp, it’s just the latest twist that makes her job even more challenging.
“That's the thing that it's been so difficult, maybe more so this year, because tariffs haven't been a story for almost 100 years,” Hepp said. “It was here and there in some sectors, but nothing at this scale. One day it's on, one day it's off, one day it's up, one day it's down. Even when you're trying to read into a CPI and trying to understand impacts, how are you supposed to understand it when you don't even know if that tariff is on or off?”
Reading the data
Hepp said for her and her fellow economists, all they can do is try to take in all the data they have and make their best judgment on where the market is heading.
“You just take the best data or information you have in the moment you say, ‘Okay, as of this moment, this is what I think,’” she said. “This may change tomorrow, but as of this moment … so, yeah, it's been really difficult. I feel sometimes when I'm asked about mortgage rates, I don't know what to say.”
What economists are doing is the same thing Fed governors are trying to do as well. Fed members are trying to balance both labor and inflation mandates, which are currently pulling in opposite directions.
In September, labor market concerns prevailed, and the Fed cut rates by 25 basis points. What the data looks like over the next month, potentially combined with more federal job losses due to the pending shutdown, could paint a different picture when the Fed meets again in late October, Hepp said.
“It all depends on where things are going to tilt,” she said. “I think this issue is coming up today in terms of the federal job cuts and the government shutdown. That very quickly can tilt the concern for labor as a primary risk. It feels to me that the risks will continue to tilt towards a slowing labor market. When you look at labor participation rates, they are all lower among most age groups from last year. Fewer people are in the labor force, and that's not good either.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
